Eaton Corporation plc (ETN) — Q3 2016 Earnings Call Transcript

Good morning. I'm Don Bullock, Eaton's Senior Vice President of Investor Relations. Thank you to all of you for joining us for Eaton's Third Quarter 2016 Earnings Call. With me today are Craig Arnold, our Chairman and CEO, and Rick Fearon, our Vice Chairman and Chief Financial Officer. Our agenda today, as normal, will typically include opening comments by Craig highlighting the company's performance in the quarter and an outlook for the remainder of 2016. As we've done in our past calls, we'll be taking questions at the end of Craig's comments. A couple of quick items before I turn it over to Craig. The press release for today's earnings announcement this morning and the presentation we'll go through have been posted on our website at www.eaton.com. Please note that both the press release and the presentation do contain reconciliations to non-GAAP measures. A webcast of today's call is accessible on our website and it'll be available for replay. Before we get started, I do want to remind you that our comments today do include statements that are related to expected future results. As a result, those are considered forward-looking statements. Our actual results may differ from those due to a wide range of uncertainties and risks. All of those are described in the 8-K. With all that, I'll turn it over to Craig.

Thanks, Don. I know that most of you have worked through the earnings release and the details of our earnings already as I've seen a number of your reports already. So what I'll try to do this morning is hit the highlights and then maybe add some color commentary around the results. First of all, you noted that EPS did come in at the midpoint of our guidance of $1.15, and we're actually pleased with these results despite revenue coming in weaker than what we expected. We delivered strong operating margins at 16% and 16.5% excluding restructuring, largely as a result of better restructuring benefits and good cost control across the company. We had another strong cash quarter. Cash flows were $798 million in the quarter. Our cash conversion ratios in the quarter were 130%, driven by strong margins and the benefits of amortization. Year-to-date, our cash conversion ratio is 110%. We took advantage of our strong cash position and we repurchased 3.7 million shares, amounting to $243 million in the quarter, bringing our full-year repurchases to 9.2 million shares or $560 million versus our target of $700 million for the year. Turning to page 4, the financial summary: total revenues in the quarter came in weaker than we expected. If you recall from our earlier guidance, we expected Q3 revenues would be flat with Q2, and organic revenues actually came in down 1%, with less seasonal growth in both of our electrical segments as well as weaker sales in Aerospace and Vehicle. Revenue is 4% lower than the prior year, with 3% of that coming from lower organic revenues. We did have strong operating performance, as I mentioned, in the quarter. A couple of points of reference for you: in comparison with Q2, we delivered $20 million more of additional segment operating profits on $93 million of lower revenue and, excluding restructuring costs, the improvement in profit was $7 million on, once again, $93 million of lower revenue. When you compare with Q3 of 2015, excluding restructuring costs, we delivered strong decremental performance, with profits down some $27 million on $216 million of lower revenue, a 12.5% decremental rate. So we continue to think that the businesses are executing extraordinarily well in a tough revenue environment, and as a result, we were able to deliver a small improvement in segment margins despite the decline in revenues. In turning our attention to the segments, we'll begin with Electrical Products. Here our revenues were flat year-on-year but down 1% versus Q2, largely due to currency fluctuations and continued weakness in our industrial markets. Areas of strength included LED lighting, which is up mid-double digits, with LED sales now accounting for 68% of our total lighting revenue. Residential Construction was up mid-single digits year-on-year as well. However, a key area of weakness continues to be industrial controls and the components that we manufacture in our Electrical Products business. Margins remain strong at 18.8%. Bookings were down 1% in the quarter, slightly better than last quarter where we were down 2%, although not up to the expectations that we had. Strength was seen in lighting in residential markets and in the Middle East and Western Europe, with continued weakness in industrial controls. In Electrical Systems and Services, revenues in the quarter were down 3%, 2% organically versus Q3 of 2015, and essentially flat sequentially from Q2. You will recall that in Q2 our bookings were down 2%, indicating a continuing deterioration in this segment, with bookings down 5% in Q3, driven by a continuation of the pattern seen throughout the year. Weakness in industrial projects in oil and gas was offset by some strength in U.S. light commercial markets and Asia-Pacific, as well as Northern Europe. Margins were 14.2% excluding restructuring costs, showing an increase from both the prior year and Q2, reflecting the benefits of the restructuring work ongoing. In the Hydraulics segment, revenues were down 6% from the prior year and down 5% from Q2. This change from Q2 to Q3 is attributed to seasonality, consistent with prior years. Q3 revenue indicates equal weakness in both OEM and distribution, with stationary down more than the mobile side, largely due to ongoing weakness in the oil and gas market. Bookings declined 3% in the quarter, consistent with Q2 levels. In Aerospace, revenues were flat organically and down 3% excluding foreign exchange impacts, primarily due to the lower British pound. Revenues were down 2% from Q2 and down 1% organically from Q2. We saw very strong margins of 20% in our Aerospace segment and also had strong quarterly bookings, up 15% in the quarter with continued strength in both Commercial and Military OEM, partially offset by continued weakness in business and regional jet activity. Aftermarket bookings were up 5% in the quarter, particularly strong on the commercial side. In the Vehicle segment, revenues were down 12% year on year, driven mainly by the large decline in the NAFTA heavy-duty truck market, where production was down 35% in Q3. Revenues were also down 5% versus Q2. We now expect the NAFTA heavy-duty truck production to be approximately 225,000 units this year, compared to our previous estimate of 230,000 units. Passenger vehicle sales in the quarter remained strong, especially in China and with modest strength in Europe. Margins, while below prior year, remain attractive at 15.5% and 16.2% excluding restructuring. Looking ahead, we anticipate ongoing industrial weakness. Our overall revenue forecast has been updated to reflect a 4% decline for the year, putting us at the lower end of our guidance. As noted on page 10, we made several meaningful adjustments to our full-year outlook. In Electrical Products, the midpoint of our guidance was adjusted down 1.5 points, primarily due to additional weakness in industrial components and products, with some softness in specific geographies such as the Middle East and Canada. In Electrical Systems and Services, the guidance was adjusted down by 0.5 basis points due to continued weakness in the oil and gas projects and a slowdown in large industrial project activity. In Hydraulics, we adjusted guidance up by 1.5 points, reflecting stabilization in China and inventory corrections among our customers. In Aerospace, we took the guidance down by 1.5 points, largely due to weakness in business and regional jets and lower military spending. Finally, in the Vehicle segment, we revised our guidance down by a couple of points due to the persistent weakness in the heavy-duty truck market and the production estimate reduction. This adjustment will result in the company's revenue being down 1% from previous guidance. Regarding restructuring, we are pleased to report that our restructuring plan is on track. Costs are essentially in line at planned levels of $145 million, with actual spending of $23 million in Q3, below our initial expectation of $27 million, reflecting some timing issues. We foresee Q4 costs at $24 million, slightly above previous guidance of $20 million. The anticipated benefits have also improved slightly to $200 million for the year, up from the previous estimate of $190 million, prominently realized in Q3. As a result, we are updating segment margin expectations for the year. Despite lower revenue and changes in the mix of restructuring, we revised our full year forecast for segment margins. For Eaton overall, this adjustment results in a reduction in operating margins of 40 basis points compared to prior guidance. Reviewing our guidance and outlook for Q4, we now expect revenues to be down 1.5 points from Q3, with margins estimated between 15.4% and 15.8%, primarily due to lower volumes and unfavorable mix. Growth in lighting continues, alongside weaknesses in industrial controls and large industrial projects, as well as the oil and gas sector. Our Q4 guidance midpoint reflects a $0.10 reduction, with a range of $1.05 to $1.15. We expect tax rates to be between 9% and 10% in Q4. For the full year, the updated revenue forecast suggests organic growth will now decline by 4%. The reduction of $0.10 in Q4 EPS translates to a 2% decline in our full year EPS guidance. As a summary of the year and Q3, we recognize a period of continued weakness in industrial markets. In light of this weakness, we believe our team delivered solid results in Q3. This order weakness is reflected in our Q4 forecast; we anticipate EPS will drop $0.05 below Q3 levels and be $0.10 below our full year guidance. Nevertheless, we expect to uphold our guidance for cash flow and share repurchases for the year. Looking to 2017, predicting outcomes remains difficult. We believe that market uncertainty and cautious capital spending will carry into next year. We observe a two-speed economy where consumer-driven markets remain strong, while industrial markets present significant uncertainty. Consequently, as mentioned in our earnings release, we've increased our 2017 restructuring program by $50 million, bringing it to a total of $180 million. Apart from that, we expect a lower pension plan discount rate next year, estimated to be down by 25 to 40 basis points. The 2016 discount rate was 4.25%. For each 25 basis points decline, there will be a $20 million increase in annual pension expense. We also expect slightly higher interest expense due to rising LIBOR and changes to money market regulations, which will affect the cost of our floating-rate debt. Additionally, some transitional interest expense from refinancing debt may emerge next year. We project a marginally higher tax rate in 2017. However, we remain on track for generating strong cash flow, with expectations of cash conversion exceeding 100%. This will enable us to adhere to our announced share repurchase program and fulfill laid out targets. This concludes my prepared remarks, and I'll turn it back to Don at this point.

Our operator will give you instructions for those of you who are going to be posing questions.

Good morning. So just as a quick clarification on some of the 2017 commentary, Craig, the $120 million of incremental profit, I'm assuming that's segment profits inclusive of restructuring, so it includes that increase in the restructuring. Is that correct?

That is correct, Nigel, so we're obviously increasing our restructuring expenses by $50 million, but we expect to see benefits in the year that will offset that additional spending.

Okay. And I'm assuming that there's some underlying sales assumption that's forming the basis of that $120 million. Maybe you could share that with us as well, Craig?

I think at this point, Nigel, all we'd really say about 2017 is that Q3 was certainly a bit of a disappointment when we took a look at a lot of our end markets and our order intake, and we expect that to continue into Q4. We're in such a period of uncertainty right now, with so much volatility in many of our end markets that it is difficult to make a call on 2017. So we made the decision to increase our restructuring, because we think this period of uncertainty will continue. But we do think it's too early to make a call on what our revenues will be next year. I think once we get past the elections and some of the uncertainty works its way through, we'll be in a better position to make a call on revenue next year.

Okay. I have just a quick follow-up on that. So the $120 million, I'm just wondering what are the boundaries on sales that you feel comfortable with that range, because there is a point by which you can't get that number. So I'm just wondering what the boundaries are around that connection to protect that range.

I think the restructuring benefits are largely a function of taking out fixed costs, support costs, and really are not in any way a function of revenue. And so those benefits are essentially independent of revenue.

Okay. I'll leave it there. Thanks.

Hi. Good morning.

Hi.

Can you talk a little bit about your Aerospace outlook and the margins for 2016? Should we think about that as just the deferral of spending that will come back in 2017 so we don't take Q4 margins as a run rate into 2017?

Yeah, and I think that's absolutely the right way to think about it. As you know, this business especially well, that the program spending tends to be quite lumpy, and you can have periods where your spending go up, periods where your programs are deferred and it comes down. And so I do think – great performance by our team operationally so we don't want to take anything away from the strong performance but, certainly, a piece of this is a function of lower program spending that will come back next year.

Okay. And I appreciate that. And then could you just comment on the Q4 guidance? Where did you get the biggest surprise across the businesses?

Yeah, what I'd say, Ann, is throughout the summer months, we principally saw weakness across most of our Electrical end markets. If you think about the markets that have been weak all along, whether it's oil and gas or large industrial projects, industrial controls, we saw each of those markets essentially weaken up a little bit throughout the summer months, and that certainly cascaded through to the order input that we saw in our Electrical Systems and Services business, which, as we reported, was down 5%. We also observed additional weakness in the North America Class 8 truck market, resulting in us reducing our forecast for that market to 225,000 units, but those are the places where we principally saw reductions. It was really pretty broad across many of the Electrical end markets, as well as the North America Class 8 truck business.

Okay. And just quickly as a clarification on the weakness in the large industrial controls, is that related to the slowdown in investment in manufacturing, you know, LNG petrochemicals?

You're absolutely right, and you've seen the C30 data just as well as we do in terms of the government data; the put in place numbers, and almost every category with the exception of health care and commercial went negative in Q3. And so you're absolutely right that across all of those end markets we saw weakening this summer. The question is whether that's a function of all the uncertainty in the current environment? In manufacturing capital equipment, everybody's taking a pause until the air clears a little bit around which way the U.S. is headed, but we saw weakness primarily in the U.S. across those markets.

Okay. I'll get back in queue, and then I'll root for the Indians.

Yes. Thank you.

Thanks a lot. Craig, I guess I just wanted to follow up on something that you mentioned at the end of your prepared remarks about confidence in hitting targets. So if you look at 2017 overall, does that mean that you're still reasonably confident of that 8% to 9% EPS CAGR target that you laid out in February? Or are you referring to something else?

Yeah, I mean, the 8% to 9% EPS CAGR was really over a five-year period, and so there's nothing that we've seen in this temporary pause to our end markets that detracts from our confidence in achieving the longer-term EPS improvement that we laid out. I think there really is uncertainty around 2017 with respect to where some of these end markets are headed. Quite frankly, we were surprised and disappointed with our bookings and the way a lot of the end markets played out in Q3. The question is whether this is a temporary pause or if it extends more thoroughly into 2017. We think it's too early to make a call.

Understood. And then on Electrical Systems and Service, profits in dollars and also the margin percentage, it's on track to fall for the third year in a row. Orders are soft, so the revenue line probably can't turn around until mid-next year at the earliest. How should we think about the approach in that business aside from just cost-cutting? Is there anything more proactive you can do in terms of project selectivity, changing the end market focus, or exiting certain business lines?

I'd say in Electrical Systems and Services specifically, as you're aware, we are indeed undertaking a significant amount of restructuring in that business. If you take a look at our margins in Q3, without restructuring, at 14.2%, we do see improvement in the underlying margins of that business. To your point about growth in this segment, it is closely tied to infrastructure spending and large projects, making it very difficult in the near term to fundamentally de-link this business or any of our businesses from the trends in those large end markets. However, we have various growth initiatives focused on every one of our businesses, including Electrical Systems and Services. In the short term, it will be challenging to significantly outperform the larger economic trends affecting that business.

Very helpful. Thank you.

Thanks, and good morning, all. Let's get a little more detail around the restructuring actions. First, just the 3Q to 4Q shift; could you provide some color on what was driving the shift?

We had a $4 million shift between quarters, as you'll note, and as we talked about. In Q3, we actually delivered $10 million more benefits than what we forecasted. So the program is very much on track, and we're very pleased with our teams' execution. But as you consider restructuring programs like this, timing always plays a role, influenced by decisions needing negotiations with work councils and unions globally. So, I would say it's a small timing adjustment between the quarters but nothing to be concerned about.

And while there are typically opportunities for restructuring across a large complex organization, what kinds of programs are you capitalizing on now with the $50 million increase for next year?

To clarify, this isn't an abrupt shift, as we've discussed in prior calls, our businesses currently have a healthy backlog of restructuring opportunities. We're continuously working on a pipeline of initiatives that our businesses propose, making sense in terms of costs, and managing these within the organizational capacity. Specifically, we are focused on taking out structural costs: management layers, fixed costs, and optimizing our manufacturing footprint worldwide. So, it aligns with the type of restructuring programs we've historically undertaken, which is why you observe a strong payback from the program we've initiated.

Is the footprint a big part of this?

It’s a mix. It always includes a combination of footprint-related and structural support cost changes. However, in all cases, these adjustments pertain to structural costs that do not rebound with fluctuations in volume.

Yeah, I’ll handle that, Steve. We think the rate between 2016 and 2017 will likely increase by approximately one percentage point. Now, that’s a very preliminary estimate since it ultimately depends on precise mix; thus, I'm currently operating under high-level assumptions. Moving forward, I anticipate the rate could increase at a pace of about a percentage point a year, not exceeding that. We'll provide a more comprehensive medium-term outlook during our formal guidance for 2017.

Okay, thanks, Rick. Thanks, Craig.

Thank you. Good morning, everyone.

Morning, John.

Hey, Craig, can I pick up please on the whole restructuring context? Looking back, it seems Eaton has been undergoing significant restructuring since the second quarter of 2014. Now that you're CEO, could you clarify the reason for this extensive restructuring? Why is there still so much work to be done? Why haven't you started cutting more deeply into inefficiencies?

One of the main reasons is if you consider the size of the company today in relation to our forecast from the last strategic planning cycle, Eaton is now smaller. Many of our end markets during this time have not met our expectations. Thus, we're resizing the company to adjust to current revenue and economic activity levels across our enterprise. Additionally, much of our growth historically has come from acquisitions, which often include excess manufacturing capacity. If you were to redesign our operations from a clean slate, you would not end up where we are post-acquisition. Hence, we're scrutinizing our structure comprehensively, determining what would be ideal in a perfect world. Consequently, we are encouraged by the fact that our businesses propose numerous ideas and recommendations for improving margins even during challenging operating conditions.

Is the nature of this restructuring more about personnel or about tooling efficiency and operational productivity?

For the most part, we continue to find opportunities to streamline support costs around our business. However, in terms of manufacturing footprint, I believe we will have opportunities for ongoing optimization into the foreseeable future. As you know, the structural costs will eventually exhaust their potential for adjustments. Today, that has not occurred, but one day it will. We anticipate maintaining a base restructuring level, which we've previously indicated tends to hover around $60 million per year – this sideshow indicates we have numerous ideas left to execute on for improving organizational efficiency. If we look at the construction markets, our access to NEMA data and similar reports gives us insights. Craig called attention to the performance in light commercial markets in the U.S. What is your view on the choppy non-residential data? Some analysts suggest non-residential markets may have peaked; what's your input on that in the context of your markets and growth prospects? It's been challenging to get a clear grasp, which likely explains the conflicting data points and mixed analysis we've seen. The NEMA and C30 reports indicate that many non-residential end markets weakened in Q3, influencing our outlook for Q4 and possibly 2017. Specifically, the industrial side of manufacturing and capital spending continue to be weak, with estimates increasing toward a decrease in revenues within low to mid-single-digit points for the year. Oil and gas remains sluggish. The rig count has picked up, yet we haven't seen substantial strength manifest in that sector, as evidenced by weaker Q3 data compared to the year-to-date.

What about China? You seem to be experiencing stability; other companies have noted as well. Is this primarily due to previous stimulus, or do you see enduring demand that may emerge despite overbuilding in property markets?

Certainly, we've observed similar strength in China that others have detailed. We recorded robust Q3 performance regarding order bookings in China, particularly in our Hydraulics and Electrical businesses. Government stimulus programs are aiding recovery. However, whether these improvements will be sustainable in the long term remains a question, considering the motivations behind stimulus measures. As of now, we're feeling more optimistic about China's stability, but its long-term outlook is still unclear.

We believe our cash flow remains robust, and the outlook for next year appears to exceed 100% cash conversion.

We should also maintain a strong cash flow strategy impacting our share repurchase plans. Our initial thoughts on 2017 are that market uncertainty and cautious capital spending trends may extend into the next year. The consumer side remains resilient, while industrial markets view remains cautious. We're expanding our restructuring programs for 2017 to a total of $180 million.

Good morning, guys.

Howdy.

As I process what you communicated on decrementals, they have been strong; however, when adjusted for restructuring, the underlying decrementals appear heavier, mainly within Vehicle. Can you share whether the decline is due to magnitude of decline or pricing pressure and what is contributing to this headwind?

Overall, we are pleased with the decrementals achieved across our businesses. We typically expect around 35% decrementals across our company, which can vary based on the business segment. We're quite comfortable with the decrementals noted across the board and have not observed any unusual pressures between cost and pricing beyond what we already anticipated. Specifically, in Vehicle, our North America heavy-duty Class 8 market has weakened, which is typically the more profitable segment. However, our margins for Q3 remained resilient at 15.5% despite market drops of 35% in North America, and excluding restructuring, margins were even higher at 16.2%. That performance remains strong during a challenging market.

That's helpful. Can you provide insight into power quality and utility? You didn’t reference either in detail. I’m also tuning in to the Indians tonight.

In power quality, markets are largely flat, with a slight increase on lower single digits for most parts. The data center market, particularly in three-phase, operates flat for the year. It's somewhat variable depending on the geographic area, but overall, we expect market performance to trend at those levels. As Richard mentioned, utilities are similarly demonstrating modest growth, aligned with our prior guidance of 0% to 2%. Overall, we are maintaining performance expectations in these segments.

And I would say that the same is true for utility; we're forecasting flat to low single-digit growth.

Right, our prior guidance suggested growth of 0% to 2%, and we are essentially maintaining that outlook.

Thanks, guys.

Craig, you mentioned there are no significant price-cost disconnects, but could you provide a forward look on this? Some cost pressures seem to be on the horizon. Are you in a position to take pricing actions to counter that? What should we expect here?

Historically we view price against input costs as neutral. In periods of inflation, we can generally pass prices to the market, just as during deflation, we may adjust pricing sequentially to align with deflation. In previous calls, we've acknowledged minimal pricing pressures in Electrical Systems and Services, but that's become a standard expectation within the business. Therefore, we don’t foresee changes to the pricing-cost relationship at this time.

Thanks. Regarding cash and cash flow going forward, perhaps a question for Rick. Cash conversion has been very strong this year with significant inventory reductions. Any early insights on such levers as pension funding and cash taxes that may affect future performance?

We have yet to finalize our detailed cash planning due to the absence of a profit plan, but understanding our depreciation and amortization patterns, and anticipating minimal pension contributions, we should remain substantially above 100% in cash conversion. I cannot specify how much above 100%, but that is my current estimate.

We appreciate that. You also noted that inventory correction in Hydraulics. Would that imply a correction in the opposite direction, perhaps restocking or rebuilding?

Yes, exactly. Several customers had notably reduced their inventory levels, so we anticipate some restocking occurred in Q3, contributing positively to our total outlook for the year.

Great. Thank you.

Good morning, everyone.

Hi.

Just one clarification on all the restructuring. Is the bulk of this a permanent stepdown in costs, or is there a portion that, should volumes bounce back, you'd have to add back? Can we assume this is much closer to 100% than any variance?

I'd be hesitant to label this restructuring as entirely permanent, but it is close to 100% in reducing structural costs that we do not plan to return with volume changes.

Can we discuss two markets? Aerospace remains positive but has been disappointing in volume overall. With visibility into 2017, should we expect the flat to slightly uptrend to hold, or could this pushback trend impact next year? Also, can you provide insight into Hydraulics? Will the restocking scenario persist, enabling positive growth next year, or are we looking at a relatively flat market?

Thanks for bringing this up. We're evaluating our 2017 outlook and prefer to defer definitive statements given the mixed signals from Q3 data. Generally, the strength we see in the commercial side of Aerospace, particularly related to Boeing and Airbus backlogs, holds promise. Consumer air travel has also performed strongly across regions. We have noted substantial weaknesses in the military sector, which we did not anticipate. Regarding Hydraulics, we see mixed data similar to what other equipment manufacturers are reporting. Conditions don't suggest any imminent changes. We believe it's unlikely we'll see a noticeable improvement in Hydraulics markets for the immediate future.

Thanks very much.

Thank you. Good morning, everyone. I'd like to revisit your Q4 guidance. Could you provide insight into expected seasonal lift this quarter? Many companies have stated they aren’t expecting sequential seasonal lift – could you share your perspective?

We align closely with that viewpoint. We mentioned that we believe our Q4 revenues ought to decline by 1.5% from Q3. Thus, given the order data from Q3, we're adjusting Q4 revenues down slightly from Q3 levels across the board.

That's helpful. Are there any comments you could share on lighting? And do you observe a mix between the two-speed economy, impacting residential and commercial-industrial?

Lighting remains a strong performer. We estimate the market's growth trajectory to be mid-single digits this year. LED continues to grow at double-digit rates, now comprising 68% of our total revenue from lighting. Lighting performance indicates strength in both residential and light commercial sectors, though there are some prevailing weaknesses in the industrial lighting segments, which are counterbalanced by growth in other areas. Looking forward, we believe lighting to be a future growth driver.

Thanks. I'll allow you to get away with that bright spot pun.

Thanks. Good morning.

Hi.

About the $180 million restructuring budget for next year, can you confirm it will be primarily first-half weighted, likely with more focus on ESS given their challenges?

We haven't developed that level of detail yet, but it’s fair to assume that the struggling businesses will comprise a larger portion of the restructuring funds. As noted, expect most of the restructuring expenditures to happen in the first half of the year.

Appreciate it. I was looking to avoid a direct pro-rate behavior in the restructuring budget, but it may still be beneficial. Did August prove particularly weak?

In general, the Q3 data didn't reveal significant discrepancies among the months, so we observed weakness across the entire duration of Q3, resulting in a lack of patterns.

Thanks. Good morning, everyone. Following up on your remarks about a lack of pattern in order input for Q3, can you provide an update after one month of Q4? Are we seeing the same trends as observed in Q3?

As we recently concluded October, our details are not fully finalized, but initial indications suggest that October's figures align closely with our Q4 expectations.

Thanks, Craig. Regarding the U.S. non-residential construction inquiry, given your Electrical business's multichannel sales method, what feedback are you receiving? Is there a perceived pullback in the planning pipeline or is the observed weakness primarily due to deferrals?

I would characterize the current scenario as largely deferrals of capital spending, rather than seeing substantial reductions in planning pipeline activities. Ultimately, companies seem hesitant to commit to significant projects amidst prevailing market uncertainty.

Thanks, Craig. Lastly, regarding Vehicle, you called attention to Class 8 weaknesses. Are you observing any similar trends in the light vehicle side from automakers like Ford?

So far, we see the light vehicle markets holding relatively strong. North America remains steady at high levels; China is showing sustained high-single-digit growth; Europe is outpacing our expectations. For now, light vehicle markets on a global scale appear stable. However, in North America, we note an uptick in incentives, with Q3 incentives exceeding Q2 levels, prompting a level of caution.

Thank you very much.

Thanks for taking my question. I'm curious about any changes to incentive compensation given the guidance adjustments this year? How might that reset affect headwinds into 2017?

Our year is ongoing, so we haven't finalized our stance on incentive compensation. Our plan will adjust if management fails to deliver the anticipated EPS guidance. Hence, it's reasonable to deduce that it may fall below 100% consistent with our business performance; this will pose a headwind for 2017, but I have yet to finalize the incentive compensation plan for this year.

Okay. Additionally, returning to the Vehicle segment, is it fair to assume that your restructuring has not yet impacted the light vehicle portion? Is this something under consideration for next year?

At this point, we cannot disclose any specific restructuring plans until we've managed those details internally and effectively communicated them with our staff.

Good morning.

Hi.

To follow up on earlier discussions, you've highlighted a current air pocket in industrial investments. Could you elaborate on customer feedback regarding project deferrals? Given the slow CapEx environment persisting for over two years now, do you believe some projects may indeed have pent-up demand once the uncertainty resolves?

The consensus among our conversations echoes uncertainty. Business decision-makers contemplating long-term capital commitments in an unpredictable economic environment and pre-election scenario understandably result in hesitation. We empathize, as these companies are managing their capital budgets and postponing major projects.

Understood. Could you characterize this capacity as pent-up demand? If uncertainty is alleviated, could a wave of investments follow?

We remain hopeful for investment upticks consistent with historical trends observed in expansions. Generally, consumer market growth should positively correlate to increased investments in manufacturing equipment, typically about a 12-month lag. However, we are already deep into that period without seeing adequate investments in the industrial sector.

At this point, we're going to wrap up our call for this morning. As always, we'll be available to take follow-up questions for you immediately after today and for the rest of the week. Thank you all for joining us for our earnings call today.